If you have been following this series, I hope that you now feel equipped to give your child a solid foundation for handling finances. But as good and important as that foundation is, a house is not built with foundation alone. At some point walls need to be put up. At some point your child will leave home and leave the safety of the financial provision you provide. At some point he will not only purchase groceries once a month, but will be feeding himself daily. He will need to fill up his gas tank, and pay rent and utilities. He will need to have money set aside for the routine oil changes as well as the the unexpected fixes.
With a solid understanding of the general concept of budgeting and the discipline to set aside money for giving, saving, and spending, it is not time to apply those skills to a more specific budget.
The first step is tracking spending.
Whatever money is spent, where does it go? Most of us do not know the answer to that question, and neither will your teen. For a month, encourage your child to save every single receipt from every single purchase. Find a safe place to store them as the month goes on. It could be another jar. A shoe box. An envelope. The container is irrelevant so long as the receipts are accessible.
At the end of the month sit down at a table with the 1. container of receipts, 2. pen or pencil, 3. a notebook.
If your child is responsible enough to do this on his own, great. If not, there is no harm in engaging in this activity with your teenager.
There are 3 piece of information that are going to be recorded as he looks at each and every receipt:
- Category (was this a clothing item, food, car gas, etc)
- Date of purchase
- Description of
- Price of purchase
Open the notebook and on the top of each page write the category headings that are expected. If car gas is a category of spending, that should be the heading of it’s own page. Use a fresh page for each category.
Take out a receipt from the box and determine the category of the purchase. Under the proper category record the date of the purchase, what the item was and the amount. A single receipt may have multiple categories; that’s no problem. Simply record each item on it’s corresponding category page.
Repeat this process for each and every receipt. If you find a purchase that doesn’t fit into one of the categories already established, simply flip to a fresh page and write that category on the top of the page.
When everything has been recorded, total each page for a total spending per category.
The first goal of this process is informative.
Answering the question – where is the money going?
The goal is NOT to chastise your child for “stupid purchases.” Remember, all of these budgeting lessons and instructions are to help prepare them for the future when they will be making their own financial decisions with the money they earn. Your role here is to offer guidance and council as is helpful, not to micromanage and tell them what to do.
Whether your child does the recording on his own or with you, it is a good idea to review it together.
Here are some questions to ask:
- Does anything on that list surprise you?
- Seeing the dollar amounts now, are there any purchases you wish you didn’t make?
- With this information, do you plan to make any adjustments for this coming month?
- Is there anything you wanted to buy last month but didn’t have the money to purchase? If so, are there ways to adjust your spending going forward to enable that purchase?
Seek to create a dialog that engages your teen in critical thinking. You want him to see the information, think on the information and make informed decisions based on the information. They may conclude that everything is hunky dorey – it could be that they are content with the way they are using their money, or it could be that they do not want to face the obvious of bad decisions. Either way, it is better to help them see things for themselves rather than reach a conclusion for them. Don’t worry, you will be back at this again next month. You do not need to point out every dumb purchase they made today. Ask questions. Listen. Encourage. And allow them the freedom to fail.
They already have a habit of giving and saving, so while you may deem their spending habits as wasteful, it is coming from discretionary money, and is not putting at risk their savings for the future. Be thankful for that.
My hope is that you have a teen who appreciates and desires the accountability. A teen who is asking questions and seeking ways to improve. If that door is opened, it will be tempting to open up a fire hose on them with advice. RESIST! Continue to ask question. Draw them out and help them establish what THEY value and how THEY want to use their money. A skilled questioner can reach the desired conclusion while allowing the other person to find that conclusion by their own reason and logic. Seek to be that skilled questioner. It may be an area in which you, as the parent, need to grow. Embrace the challenge – for your benefit and theirs.
(another way to track spending is making a simple Excel spreadsheet. The spreadsheet is my preferred method. It is fairly simple to set up, but if you’d like the template I use, shoot me an email and I will send it to you)
Second step – creating a spending plan.
Armed now with a 1-3 months worth of data on where the money goes, let’s put together a spending plan. How much is need to keep the car gassed up all month? What is a reasonable amount to spend on eating out? What amount money for entertainment — movies, mini-golf and the like. With the record of where money went over a full month, one can craft a plan to decide before hand how much is allocated for each category. If $25 is set aside for entertainment, and it’s only May 10 and $20 has already been spent, then there is only $5 left for that spending category and intentional decisions need to be made to make that money last.
What this plan will look like will vary greatly from teen to teen. Some teens have jobs and make some sort of a steady paycheck. Others do not and will have less money to work with. Some teens have cars, others don’t. Where you live will make a difference — city to suburb to rural create vast differences in prices as well as spending habits.
This is a great time to move to an envelope system. Take an envelope for each spending category and write the category name on the outside. In pencil, write the amount allocated for that category on the outside. As money comes in to fund that category and money goes out from spending, record those dollar amounts on the outside and place the receipt inside. Once the money is gone, spending in that category is done. This is a simple yet effective way to stay on track with your spending plan.
Third Step – budgeting for adult life
Your teen is well on their way to be a fiscally responsible adult. They are faithfully dividing their money into giving, saving and spending. They are creating a spending plan to be intentional with their spending money and are tracking where their dollars go. But without this last step, they may be blind sided by sticker shock when they are launched into full adulthood.
Life is expensive. Rent. Food. Auto insurance. Health insurance. All of it. Life isn’t cheap.
So what needs to be done to transition them from their teenage budget to independent adult budgets.
Firstly, they need to know what to expect. Most likely their expectations are not in line with reality — from how much they will make to how much an apartment will cost, their figures are likely skewed.
Everything else we have done thus far has been put into practice, this next task is theoretical. Because your child doesn’t yet have a full time job, living on his own, purchasing his own groceries and footing his own car insurance bill, we are about to enter into the world of make believe. The specifics matter less than the process. What I mean by that is your 17-year-old likely doesn’t know what job he will have when he graduates college (if he is going to college), nor what salary he will make, so with realistic and reserved estimates, begin to create a formal budget. If your teen is interested in nursing, don’t take the high end of the salary scale for new graduates and possibly over-inflate their expectations. Go with the low end of that scale so that he doesn’t begin to mentally spend money he may not even earn.
I highly recommend getting downloading Dave Ramsey’s Quick Budget guide. It will provide the structure for a budget and allow these theoretical figures to be entered.
Search out studio and 1-bedroom apartments in your area. This is how much your child can expect to pay for rent — use that figure on the budgeting sheet.
Let them get a price quote for auto insurance, not on your policy. Sticker shock! It’s expensive for a new drive. That goes on the budget sheet.
Dave’s quick budget sheet will point out some overlooked budget items. Some of the items won’t be applicable right now, but will be one day.
So, after all of the hard work you and your child have put into learning financial responsibility, this last step is the capstone in a sense. It provides them a full picture of financial life. It gives them a realistic view of money and the skills to wisely use money.
But it’s not a graduation. This isn’t the last lesson to teach and then the books can get put away on a shelf — never to be seen again. Finances are an everyday part of life and your child will continue to give, save and spend. He will continue to create a spending plan, continue to track his spending and make necessary tweaks. You have given the needed tools to be prepared, but more refined wisdom and council will surely be necessary. What car to buy? What job to take? Rent or buy? There are still make decisions facing your teen in the next few years and hopefully you have a relationship such that your teen welcomes your council because you aren’t ready to pounce on their mistakes, but are eager to ask questions to seek understanding and gently guide them towards wisdom.
I hope this has been a helpful series. These few posts certainly are not an exhaustive look at finances, but rather a primer for how to teach your kids how to budget. I highly recommend Dave Ramsey for more in depth resources. I was not taught these principles growing up, and I made many dumb financial decisions post college as a result. Dave Ramsey was the first one to provide me with a logical plan that I could follow, step by step. I wish I knew then what I know now, but the best I can do is pass on my information to my children to help them avoid the same mistakes I made and give them the tools needed for them to make wise decisions. I hope you do the same for your children.
We aren’t totally done with the topics of finances, however.
Up next…Teach Your Child…how to balance a checkbook.